Is This Hope for SCTY Stock?
SolarCity Corp (NASDAQ:SCTY) is one of the most closely watched tickers on the market, especially since Tesla Motors Inc (NASDAQ:TSLA) offered to absorb all outstanding shares of SolarCity stock. The deal values each share of SCTY stock at $24.16, yet it is currently trading at $16.89.
Investors are either skeptical that Tesla shareholders will approve the deal, or they are wary of SolarCity’s potential as a solo act. In either case, there is a cloud of pessimism hanging over the rooftop solar company. The market has turned bearish on solar energy companies in general, which I think is a mistake.
Google’s (Alphabet Inc (NASDAQ:GOOG)) Director of Engineering, Ray Kurzweil, gave an interview this week which summarizes my entire point of view. He is a celebrated inventor, author, and entrepreneur. He also thinks solar energy could meet all energy demand within a dozen years.
He understands that people think in linear terms. It took solar energy 10 years to deliver two percent of our energy supply, so people think it will take another four decades until it provides one-tenth of our energy. But Kurzweil explains that technology evolves more quickly than that. Its growth is exponential.
His insight could help clarify the true value of SolarCity stock. If demand for its products starts to double every year, SCTY stock would skyrocket. It would be a stunning growth run the likes of which we’ve scarcely ever seen.
The Next Decade for SCTY Stock
Kurzweil calls this process “Accelerating Returns.” He has countless examples, but my favorite is the one about the human genome project. In 1990, scientists set out to map human DNA. Seven years later, they were only 1.0% through the project. It seemed like a failed endeavor, but then accelerating returns kicked in. Over the next seven years, scientists completed the remaining 99.0%.
How is that possible? Simple: it only takes seven “doubling periods” to accelerate from 1.0% to 99.0%. Kurzweil believes solar energy could undergo a similar acceleration, suggesting that SCTY stock is trading way below a fair price.
Here’s the full quote from Kurzweil:
Solar energy is growing exponentially because we’re applying nanotechnology to the construction of solar panels and energy storage. It’s now 2 percent of the world’s energy, so people dismiss it as: “It’s 2 percent. It’s a nice thing to do. It’s a fringe player. That’s not going to solve the problem.” They are ignoring the exponential growth. Two percent is only six doublings from 100 percent. We’re doubling every two years. That’s 12 years. We can meet all of our energy needs through solar.
If Kurzweil is right, and he usually is, SolarCity stock could be on the verge of extraordinary gains. Not just SCTY stock, but the entire solar industry. Investors are simply looking at the adoption of solar technology as a linear phenomenon, which is completely wrong. We have to consider the power of accelerating returns.
Let’s look at the worst-case scenario for SCTY stock. Imagine that the merger with Tesla falls through, the share price takes a hit, and investors demand that the company find a new suitor. At that point, investors might be tempted to think that SolarCity stock is on its last leg.
They would think, “Hey, I remember how much SolarCity’s revenues grew last year. If they keep going like that, it’ll take decades to see any returns.” This is what Kurzweil means by linear ways of thinking. But they’d have forgotten the law of accelerating returns. It shows that we are only six “doubling periods” away from complete adoption of solar power. SolarCity stock would surge well before we get there. So even the firm’s worst-case scenario ends with a win.
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